Business Case Development

What Why and How

Dave Angelow Executive Principal April 2011

Tonights Plan
Discussion of Why a Business Case is Needed
Review of what is contained in a business case
Discuss how to create a business case
Who is Dave Angelow
Expert in value-stream mapping, process improvement and business case development Focus
on start-ups and high-growth companies Primary assistance is driving improvements in revenue
or costs
12 years experience in business operations and program management with high-tech companies
Dell Applied Materials Freescale/Motorola Over 10 years management consulting
experience Deloitte Consulting Ernst & Young Kalypso Business Foundations
Why Create a Business Case?
Executive Management is charged with making decisions on effective use of corporate
resources
A business case helps organizations estimate the costs and benefits from project efforts
Comparing the expected outcomes from different efforts, management is able to determine
where to allocate resources
Every organization has constraints and needs to determine where to invest resources Facilities and Equipment,
Materials and Supplies, Payroll/Personnel
Assumption materials in this presentation focus on internal improvement, a businesscase for new
products/development is different
Assumption #2 You own building the business case, or have a key role to contributedata for the business
case and understanding where the business case fitsorganizationally



What is a business case?
A business case captures the reasoning for initiating a project or task.
The logic of the business case should help evaluate the costs and benefits of resource
consumption
Business cases are most often used to evaluate projects to make decisions they are the initial
screen for a project
Should we initiate the project go/no-go
If a go what priority should we give the project

A business case is not financial model
Financial modeling tools like NPV, IRR, WACC, etc. can be applied to business case data;
however the data from the case are just an input into models
Financial models can be complex and are more often used for accounting or finance
applications

How is business case information used in decision-making

Business activities all into two major categories Operations or Projects
Operations are the core value-adding activities needed to generate profits
Projects are temporary efforts to achieve a specific outcome
The information from the business case enables understanding the costs and expected benefits from
a project
Companies need to make decisions on how to allocate limited resources


The difference between Projects and Operations
Projects - A temporary endeavor to create a unique product, service or result 4th Edition of
PMBOK
The temporary nature of a project indicates a defined beginning and end; the end is reached
when the projects objectives are achieved or its determined they cannot be achieved (note,
temporary does not ne cessarily mean short in duration)
Operations Recurring work effort that follows generally defined processes, procedures and
existing organizational capabilities.
As organizations mature, there is often a greater focus on improvementprojects with a goal of increasing
profitability

Simplified Business Model Financial components of a business case

Creating a business case requires critical thinking
Business case development is a value-added activity and requires four major components
Understand costs/resources that a project will require Define the benefits that will be derived
upon completion Identify risks that may occur during the course of the effort Capture the
assumptions behind the estimates

Approach for Business Case Development

Assumptions on the case
Implementation of new internal-use software capability
Uncertainty on benefits different people on the team have different opinions on magnitude of
impact
Cost estimates are from quotes and have higher degree of accuracy than benefit estimates
Estimating Costs
Cost estimates are frequently based on quotes or bids, or values from finance/accounting
Good practice is to outline broad cost categories and decompose to ensure all elements are included
Categories could include areas like:
Hardware Costs Development/Test Tools Software Costs
Internal Staffing Costs
External Staffing Costs
Etc
Categorize costs as One-time, or Recurring
Challenge with one-time costs is to be sure they dont recur or have some portion that recurs
(maintenance fees, etc.)
Recurring costs should be estimated to have periodic increases Cost of Living Adjustments, increases
in rates, etc.
Sample Cost Estimating Template


Estimating Benefits
Creating an estimate of benefits can be more complex than estimating costs because
Efficiency gains may not translate into financial benefits
Step-function within a range costs are the same (450 min phone plan, no
benefit if you use 200 or 449 min)
Saving hours may not reduce costs, people have more free time but payroll is flat
unless someone leaves
Confirmation Bias tendency for people to favor information that confirms their
preconceptions regardless of whether the information is true
We need this project and well make it so
Like estimating costs, the best approach is to outline benefit categories, determine if one-time
or recurring, and be sure to include changes over time



Sample Benefit Estimating Template


Non-financial factors are also components of a business case
Non-financial factors Organizational Risks, resistance to change Employee Satisfaction,
potential turn-over Other Risks (governmental, environmental, competitor response, etc.)
18. Assumptions and Rationale Documenting the assumptions and rationale for both costs and
benefits is critical All estimates are wrong, some are useful Estimates are imperfect,
providing details as to behind the numbers are relevant to help with understanding Discussions
around the relevant range is critical Business cases are essentially sales tools selling finance,
product management or others on an idea and direction, and getting $$$ Assumptions and
rationale bring the numbers to life and create the entire picture
19. Sample Completed Business Case Most likely One Time Benefit One Time Benefits Recurring
Fees Cost Categories Recurring Fees Fees Yr1 Yr2 Yr3 Yr4Software Costs Yr1 Yr2 Yr3 Yr4 Increased
Efficiency Manual Process Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000
Elimination $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000 Cycle-time reduction $ - Database
Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $ - Additional 3rd Party
$ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Subtotal $ - $ 20,000 $ 100,000 $ 300,000 $ 500,000 Software
Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount ReductionHardware Costs
Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Design Centers
$ - $ 250,000 $ 500,000 Other Subtotal $ - $ 100,000 $ 250,000 $ 500,000 $ - Subtotal $ 50,000 $
2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure BenefitsInfrastructure Costs Network $ - $ 5,000 $
5,000 $ 8,000 $ 8,000 Eliminate CSS Support $ 10,000 Other $ - Consolidate Number of Subtotal $
- $ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 500,000 Other $ -Implementation Costs Subtotal $
510,000 $ - $ - $ - $ - Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $ 57,881 Grand Total $
510,000 $ 120,000 $ 350,000 $ 800,000 $ 500,000 Internal Business Staff $ 250,000 Software
Services $ 25,000 4 Yr Total $ 2,280,000 3rd Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator
Subtotal $ 925,000 $ 50,000 $102,500 $ 55,125 $ 107,881 ProjectedGrand Total $1,105,000 $
79,600 $134,600 $ 96,625 $ 160,881 1.45 Return4 Yr Total $ 1,576,706
20. Sample Completed Business Case Sensitivity 1 (pessimistic) Benefit Recurring Fees
Categories One Time Benefits One Time Cost Categories Recurring Fees Yr1 Yr2 Yr3 Yr4
FeesSoftware Costs Yr1 Yr2 Yr3 Yr4 Increased Efficiency Manual Process Elimination $ - $ 20,000 $
250,000 $ - $ - Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Cycle-time
reduction $ - Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $
- Additional 3rd Party $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Software Subtotal $ - $ 20,000 $
250,000 $ - $ - Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount
ReductionHardware Costs Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $
7,500 $ 12,500 Design Centers $ - $ 100,000 $ 100,000 $ 100,000 Other Subtotal $ - $ 100,000 $
100,000 $ 100,000 $ 100,000 Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure
BenefitsInfrastructure Costs Eliminate CSS Support $ 100,000 Consolidate Number of Network $ -
$ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 250,000 Other $ - Other $ - Subtotal $ - $ 5,000 $ 5,000 $
8,000 $ 8,000 Subtotal $ 350,000 $ - $ - $ - $ - Grand Total $ 350,000 $ 120,000 $ 350,000 $
100,000 $ 100,000Implementation Costs Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $ 55,125 $
57,881 4 Yr Total $ 1,020,000 Internal Business Staff $ 250,000 Software Services $ 25,000 3rd
Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator Subtotal $ 925,000 $ 50,000 $102,500 $
55,125 $ 107,881Grand Total $1,105,000 $ 79,600 $134,600 $ 96,625 $ 160,881 Projected .654 Yr
Total $ 1,576,706 Return Projected Return 0.65
21. Sample Completed Business Case Sensitivity 2 (optimistic) Benefit Recurring Fees Categories
One Time Benefits One Time Cost Categories Recurring Fees Yr1 Yr2 Yr3 Yr4 FeesSoftware Costs
Yr1 Yr2 Yr3 Yr4 Increased Efficiency Manual Process Elimination $ - $ 20,000 $ 700,000 $ 900,000
$ 700,000 Application Software $ 100,000 $ 17,000 $ 17,000 $ 20,000 $ 25,000 Cycle-time
reduction $ - Database Software $ 25,000 $ 4,250 $ 4,250 $ 5,000 $ 6,250 Other (decribe below) $
- Additional 3rd Party $ 5,000 $ 850 $ 850 $ 1,000 $ 1,250 Software Subtotal $ - $ 20,000 $
700,000 $ 900,000 $ 700,000 Subtotal $ 130,000 $ 22,100 $ 22,100 $ 26,000 $ 32,500 Headcount
ReductionHardware Costs Austin $ - $ 100,000 Application Server $ 50,000 $ 2,500 $ 5,000 $
7,500 $ 12,500 Design Centers $ - $ 500,000 $ 500,000 $ 500,000 Other Subtotal $ - $ 100,000 $
500,000 $ 500,000 $ 500,000 Subtotal $ 50,000 $ 2,500 $ 5,000 $ 7,500 $ 12,500 Infrastructure
BenefitsInfrastructure Costs Eliminate CSS Support $ 700,000 Consolidate Number of Network $ -
$ 5,000 $ 5,000 $ 8,000 $ 8,000 Tools $ 500,000 Other $ - Other $ - Subtotal $ - $ 5,000 $ 5,000 $
8,000 $ 8,000 Subtotal $ 1,200,000 $ - $ - $ - $ - Grand Total $ 1,200,000 $ 120,000 $ 1,200,000 $
1,400,000 $ 1,200,000Implementation Costs Internal IT Staff $ 150,000 $ 50,000 $ 52,500 $
55,125 $ 57,881 4 Yr Total $ 5,120,000 Internal Business Staff $ 250,000 Software Services $
25,000 3rd Party Systems $ 500,000 $ 50,000 $ 50,000 Integrator Subtotal $ 925,000 $ 50,000
$102,500 $ 55,125 $ 107,881Grand Total $1,105,000 $ 79,600 $134,600 $ 96,625 $
160,881Projected 3.254 Yr Total $ 1,576,706 Return Projected Return 3.25
22. Tips, Trick and Techniques (pitfalls to avoid) Ensure data as complete as possible Creating
estimates requires data, be sure data is as complete as possible (IE, multi-year project will likely
have increased labor costs) Document Assumptions Developing business cases requires making
projections into the future; document all assumptions Build models using variables not fixed
values Assume youll have to explain the impact of a change in value for any financial factor
construct models to make changing any value easy Dont Sandbag All estimates are wrong,
some are useful; use sensitivity analysis/scenario analysis to box upper and lower expectations
23. Presenting the Business Case Pre-sell meet with finance early and get buy-in Ask for
templates and formats that are preferred Seek a review to gain feedback/agreement with cost
and benefit estimates Make Recommendation Say why the project matters and what will
happen if you dont do it Support the position with assumptions and rationale Have different
models with various assumptions
24. Recap Business cases help organizations evaluate project efforts and determine go/no-go
and priority Sensitivity analysis should be included test the upper and lower ranges to
understand impact of assumptions and risks The business case is the foundation for investment
decision-making Complexity of the business case is often a factor of investment size